How Tata Power will benefit from Indian regulator's tariff order

Find out what the tariff's about.

According to Fitch, recently, India’s central power industry regulator issued a tariff order granting Coastal Gujarat Power Limited, a subsidiary of Tata Power Company Limited, a tariff increase retroactive from 1 April 2013 to cover its fuel costs. 

India’s Central Electricity Regulatory Commission (CERC) also ordered CGPL’s customers to pay back losses that CGPL incurred in the fiscal year ended 31 March 2013, via 36 monthly instalments.

Here's more from Fitch:

The tariff increase will reduce CGPL’s financial losses and benefit TPC’s credit quality. CGPL is a material part of TPC group and its debt accounted for approximately 30% of total consolidated debt as of 31 March 2013.

The tariff increase will be calculated via the tariff formula set out in CERC’s order. The regulator estimated the gross tariff increase for fiscal 2014 will be INR0.524 per kilowatt-hour, subject to final calculations and actual costs incurred.

Although the regulator’s order is binding on state distribution companies, they can appeal the committee’s decision through the Appellate Tribunal and subsequently, the Supreme Court, which could delay the tariff increase. Assuming no delays to implementation of the tariff order, we project TPC’s funds from operations (FFO) interest cover would be 1.5x-1.8x in fiscal 2015 and retained cash flow (RCF) to debt would be 5.8%-7.9% for the same period.

The tariffs under CGPL’s current power purchase agreements do not allow it to fully recover the cost of fuel and consequently have dragged on Tata Power’s group performance. TPC took an INR18 billion ($331 million) impairment relating to its CGPL investment in fiscal 2012 and another impairment of INR8.5 billion ($156 million) in fiscal 2013.

The regulator’s order is similar to the one it issued for Adani Power (unrated) on the same date, another power producer whose subsidiary is also losing money because current allowable tariffs do not cover its cost of supplying electricity.

CGPL owns and operates the 4,000-megawatt Ultra Mega Power Project in Mundra. In 2007, TPC won the CGPL project by bidding a 25-year levelized tariff of INR2.26 per kilowatt-hour, which was based on forecasts of coal prices below current market rates.

CGPL can only partially pass through this coal-fired plant’s fuel costs to customers, given the terms of the power purchase agreements. Although the tariff structure for CGPL’s power purchase agreements includes fixed and variable elements, only 45% of the variable portion relating to coal fuel costs can be passed on to customers.

The CGPL project relies entirely on coal imported from Indonesia. The Indonesian government’s directive to export coal at market rates in 2011 exposed CGPL to considerably higher costs than it expected at the project’s inception. CGPL filed its petition with CERC to seek tariff revisions under the power purchase agreements to allow it to pass through the higher costs arising from the 2011 Indonesian government directive.

CGPL’s total capacity of 4,000 megawatts was commissioned in five stages, with the last 800-megawatt unit fully commissioned in March 2013. TPC’s total installed generation capacity on 25 February was 8,560 megawatts.